Wind turbines operate at the Gouda wind power plant alongside a road at dusk in Gouda, South Africa, on Wednesday, March 3, 2021.
Dwayne Senior / Bloomberg via Getty Images
ESG growth
Investor demand for ESG funds has grown sharply in recent years.
Investors injected $ 51.1 billion in new money into these funds in 2020, a record and more than double the previous year, according to Morningstar.
These funds may, for example, invest in energy companies that are not dependent on fossil fuels or in companies that promote racial and gender diversity.
Money managers also offer new ESG funds to investors. The number of sustainable funds available to American investors has grown to almost 400 in the past year – a 30% increase from 2019 and an almost four-fold increase in a decade, according to Morningstar.
Trump rule
Still, a small percentage of corporate retirement plans offer ESG funds.
About 3% of 401 (k) plans have an ESG fund, according to the Plan Sponsor Council of America. A fraction of the plan’s assets (a tenth of 1%) is held in these funds.
Workplace retirement plans – one of America’s biggest pots of wealth – represent a huge untapped source of growth.
The Department of Labor measure does not explicitly claim or prohibit ESG funds under 401 (k) plans. But it can prevent acceptance already lackluster, according to experts.
The Trump era rule requires employers – who make decisions about 401 (k) investments – to consider only factors such as the risk and return of a fund (rather than characteristics such as a social or environmental asset) when choosing 401 funds (k). Otherwise, employers may request further legal scrutiny.
The Department of Labor has also explicitly banned employers from automatically enrolling workers in an ESG-focused fund. Automatic enrollment has become an increasingly popular way to encourage workers to invest in a 401 (k).